The Tax Cuts and Jobs Act (“the Act”) of 2017 was signed into law by President Trump on December 22, 2017. The Act introduced a significant tax reform that included many personal and corporate tax changes. Most of the tax changes are effective for tax years beginning after December 31, 2017 and some changes are only in place through to 2025.
US Personal Tax Changes
The US personal tax changes include the following:
- Reduction in individual income tax rates ranging from 0% to 4% depending on the tax bracket. The top rate is now 37% for income greater than $500,001 for single taxpayers (reduced from 39.6% at an income of greater than $426,701).
- The personal exemptions have been eliminated.
- The standard deduction has almost doubled to $12,000 for a single taxpayer (increased from $6,350).
- The child tax credit has doubled to $2,000 for each dependent under age 17 with a social security number.
- The deduction for alimony payments and their inclusion in the income of the recipient for divorce or separation agreements executed after December 31, 2018 has been eliminated.
- Certain itemized deductions have been reduced or eliminated.
- Pass-through businesses such as partnerships, LLCs, S corps, and sole proprietorships may now receive a 20% deduction of its domestic “qualified business income” (QBI). QBI does not include certain service providers such as accountants, doctors, lawyers, etc.
Estate and Gift Tax Exemption
The Act has also brought about a significant change to the Federal Estate and Gift tax exemptions. The exemption for estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, has been doubled to $10 Million (indexed for inflation, the 2018 exemption will be $11.2 Million).
Corporate Tax Changes
- New flat corporate tax rate of 21% (reduced from the previous 35% maximum corporate rate).
- The corporate alternative minimum tax has been repealed.
- The bonus depreciation has doubled to 100% for certain assets placed in service after September 27, 2017, and before January 1, 2023.
- Net Operating Losses are now limited to 80% of taxable income and have an indefinite carryforward period. However, there is no longer the ability to carryback losses.
- Interest expense deduction is limited to 30% of Adjusted Taxable Income.
International Tax Changes
In addition to the above changes, there are some significant changes to many international tax provisions. The following link is to an article published by Friedman LLP (our DFK affiliate in New York), which provides a good summary of these provisions: https://www.friedmanllp.com/insights/2017-tax-reform-international-tax-provisions-in-the-conference-report
Included in the changes to the international tax provisions, are a few matters we expect to affect our US citizen clients that own shares of a controlled foreign corporation (“CFC”). Specifically, there is a new one-time Transition Tax and a new tax on Global Intangible low-tax income. For any US Citizens owning CFC’s, these two changes will have a significant effect going forward.
- Transition Tax
The one-time Transition Tax applies to US persons owing an interest in a CFC or owning at least 10% voting stock in a foreign corporation with at least one US domestic corporate shareholder. The tax is applied to the US person’s proportionate share of the foreign corporation’s undistributed earnings and profits at a rate of 15.5% for cash assets and 8% for illiquid assets. For US individuals, the transition tax will be applied in the 2017 taxation year and there is election to have the tax liability paid over a period of up to 8 years.
- Global Intangible Low-Tax Income (“GILTI”)
Effective for taxation years beginning after December 31, 2017, a 10% US shareholder of any CFC will be required to include in their adjusted gross income their proportionate share of the CFC’s GILTI regardless of whether it is distributed from the CFC. The GILTI is essentially the annual earned income of a CFC in excess of a 10% rate of return on its tangible assets.
The US tax changes noted above are not an exhaustive list but you can see that there are many changes that may affect cross-border taxes and transactions for all types of persons and entities.
If you have questions or require additional details, please contact us.
The information provided is intended for general purposes only. Care has been taken to ensure the information is accurate. However, no representation is made as to the accuracy thereof. The information should not be relied upon to replace specific professional advice.